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Reserve Bank comfortable with rates

Peter RyanUpdated
Tue 19 Mar 2013, 3:01 PM AEDT

The Reserve Bank has confirmed the recent heavy cuts to the official interest rate are starting to have an impact on Australia's economy. The upbeat comments come after the 1.75 percentage points in cuts since late-2011. The RBA left the cash rate at 3 per cent earlier this month while signalling that 'further reductions may be required.'

Transcript

ELEANOR HALL: Let's go first though today to the Reserve Bank board, which confirmed that its cuts to the official interest rate are starting to have an impact on Australia's economy.

The upbeat comments come after six rate cuts since late-2011. But the RBA also signalled that it has the capacity to cut rates again if the eurozone situation deteriorates.

Our business editor Peter Ryan is just back from RBA headquarters in Sydney's Martin Place and he joins us now.

So Peter, could these comments indicate the end of the official rate cutting cycle?

PETER RYAN: Well these are very upbeat but cautious comments from the Reserve Bank and they're taken from the minutes from the last board meeting, where the cash rate was left on hold at 3 per cent, and as you said, six rate cuts since late-2011 - 1.75 percentage points in cuts.

The minutes say that interest sensitive parts of the economy are continuing to show signs of responding to these lower interest rates, in other words those hefty rate cuts are starting to work their way through and there are signs that parts of the economy are starting to feel better.

But the board has noted that the rate cuts perhaps still had further to run in working their way through the economy, and they've repeated again that there is scope to cut the cash rate further to support demand.

So while the economy appears to be picking up and responding, the Reserve Bank really is keeping its insurance policy open of cutting rates if the need arises.

ELEANOR HALL: Well that might arise of course. In terms of the problem in Cyprus, was there any mention made of the weaknesses internationally and particularly in the eurozone?

PETER RYAN: Well we need to point out that the meeting, which these minutes was based on, took place two weeks ago and we only just became aware of the very serious situation in Cyprus over the weekend, where it appears that a proposal to tax bank deposits at varying levels is potentially enough to cause runs on banks, and this is a very serious flare up in the whole eurozone crisis, particularly because Cyprus accounts for less than 1 per cent of the eurozone's economy but it is a very serious signal if you're an investor with money in France or Germany or another eurozone economy that if the IMF and the EU decide that the current austerity isn't working or there's another phase that needs to take place, perhaps similar levies of deposits might be the next stage.

And of course this is causing investors to think well what can we do to move our money elsewhere and there was a sign this morning that the two year bond rate from Switzerland had fallen to zero per cent, a sign that some people may well be pumping their money from other economies into the safety or the haven of Switzerland.

Now, as I said, these minutes were written before the Cyprus situation came up, but the Reserve Bank's deputy governor, Philip Lowe was speaking in Sydney this morning. He was asked about the Cyprus situation and he responded saying he was surprised and concerned that ordinary deposit holders in Cyprus were being targeted in this bailout.

PHIL LOWE: For quite a long time now we've been describing the European situation as two steps forward, one step back. I think that remains a reasonable characterisation and what we've seen in the last couple of days is a step back.

I would have to say, I was very, very surprised at the announcements earlier this week. The idea that you would go and effectively haircut small depositors to help a government's fiscal situation was not something that has really been countenanced by the international community before.

ELEANOR HALL: That's the RBA's deputy governor, Philip Lowe speaking this morning after the release of those minutes.

So Peter, how has the Australian dollar reacted to these comments and to the minutes from the central bank?

PETER RYAN: Well over the last week the Australian dollar has moved up from as low as 102 US cents, this morning 104.01, moved just a bit higher after those very positive minutes from the Reserve Bank.

But given the situation in Europe, that could turn around as investors seek the havens of gold and the US dollar.

We won't know until the banks open in Cyprus over the next couple of days, and of course we have to wait to see what happens when the parliament in Cyprus votes on these particular levies that have been proposed at the moment.